Guaranteed Investment Contracts (GICs) for Municipal Bond Proceeds

A guaranteed investment contract, or GIC, is an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity, in the MSRB glossary's general definition, and for municipal bond proceeds it is the contract an issuer deposits unspent dollars into while a construction project, reserve or escrow draws them down.

It is one of the bond-proceeds investments an issuer can hold alongside repurchase agreements and structured Treasury portfolios.

What is a guaranteed investment contract?

A guaranteed investment contract is an agreement with a financial institution under which the provider guarantees a fixed rate of return and a fixed maturity, which is the MSRB glossary's general definition of the instrument.

Bond-proceeds GICs often carry flexible draw schedules rather than a single fixed maturity, so the general definition fits this use only loosely.

Federal tax law reads the term broadly: Treasury Regulation §1.148-1(b) says a guaranteed investment contract includes any nonpurpose investment that has specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, and the same section includes any agreement to supply investments on two or more future dates, such as a forward supply contract.

The securities-law definition runs parallel: the Exchange Act covers any investment with specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, including forward supply contracts, and the SEC rule limits it to contracts relating to investments of proceeds of municipal securities or municipal escrow investments.

The SEC has described these reinvestment products as instruments typically tailored to a municipality's specific collateral and spend-down needs, naming GICs, repurchase agreements and forward purchase agreements.

A GIC is a municipal financial product under 15 U.S.C. §78o-4(e)(5), which defines the category as municipal derivatives, guaranteed investment contracts and investment strategies.

The regulation's definition says "includes", so it is not exhaustive, and whether a particular repurchase agreement or forward delivery agreement is a GIC for a given issue is a determination for bond counsel.

How do GIC withdrawals match project draws?

A bond-proceeds GIC is built around the way the project spends: as a condition of the safe harbor, Treasury Regulation §1.148-5(d)(6)(iii)(A)(5) requires that, for purchases of guaranteed investment contracts, the terms of the solicitation take into account the issuer's reasonably expected deposit and drawdown schedule for the amounts to be invested, the schedule an issuer builds as a draw schedule from its project budget.

That condition gives practical effect to the tax definition's "specifically negotiated withdrawal or reinvestment provisions": a project fund GIC often permits scheduled principal withdrawals instead of holding the balance to a single maturity.

The mechanics are covered in the guide to GIC withdrawal provisions.

How is a GIC rate set through competitive bidding?

When an issuer uses the bidding safe harbor, the rate is set by solicitation: for a GIC, Treasury Regulation §1.148-5(d)(6)(iii)(C)(1) requires the winning bid to be the highest yielding bona fide bid, determined net of any broker's fees.

That rule matters because a GIC is not of a type traded on an established securities market, and Treasury Regulation §1.148-5(d)(6)(i) treats such an investment as rebuttably presumed to be bought or sold at a price that is not its fair market value, which is why GICs and escrow portfolios rely on the competitive bidding safe harbor.

Treasury Regulation §1.148-5(d)(6)(iii) supplies the replacement for the presumption: the purchase price of a GIC is treated as its fair market value on the purchase date when a bona fide solicitation, qualifying bids, the winning-bid rules, a provider certification and record retention requirements are all satisfied.

Falling short of the safe harbor means the issuer loses the presumption; it does not automatically mean the price was not fair market value.

For investments other than GICs, such as escrow securities, the winning bid must instead be the lowest cost bona fide bid, including broker's fees, and no more than the cost of the most efficient all-SLGS portfolio, a comparison made when bids are due and not required if SLGS sales are suspended that day.

Who bids, certifies and reports

A provider of a GIC is generally not a municipal advisor as long as it does not engage in municipal advisory activities such as advising the municipal entity or obligated person about the purchase, the SEC said in Release No. 34-70462.

Guaranteed investment contract brokers, by contrast, fall within the municipal advisor definition to the extent they meet it; in the SEC's economic analysis, 192 municipal advisors identified themselves as guaranteed investment contract brokers or advisors as of December 31, 2012, against 682 identifying as financial advisors, in overlapping self-reported categories.

As another condition of the safe harbor, the provider of the investments, or the obligor on the GIC, must certify the administrative costs it pays or expects to pay to third parties in connection with supplying the investment, under Treasury Regulation §1.148-5(d)(6)(iii)(D).

On fees, Treasury Regulation §1.148-5(e)(2)(iii)(B)(1) treats a broker's commission as reasonable when the amount treated as a qualified administrative cost does not exceed the lesser of $30,000 or 0.2% of the computational base, or $3,000 if more, and when no more than $85,000 per issue is treated as qualified administrative costs for all such investments; the computational base for a GIC is the gross proceeds reasonably expected to be deposited over the contract's term.

Those are base-year amounts adopted by Treasury Decision 9097, effective for bonds sold on or after February 9, 2004, and they are indexed for inflation from that 2003 base year, with the amounts applied being those for the year the GIC is acquired, so the figures in effect for a current issue are higher than the 2003 base.

The safe harbor does not cap fees: a larger fee may still be reasonable under §1.148-5(e)(2)(iii)(A), but the safe harbor is not available for the excess.

The purchase then shows up in the tax file: Form 8038-T (line 30) asks whether gross proceeds of the issue were invested in a GIC, the name of the provider and the term of the GIC to the nearest tenth of a year, and line 26 asks about qualified administrative costs taken under the GIC and defeasance escrow rules.

Form 8038-G (line 36) asks the parallel question for issues that file that form, and the certifications and records land in a compliance file at closing.

mGIC runs this process for issuers as an independent Bidding Agent that drafts bid specifications, solicits qualified providers, manages questions and compares bids on rate and non-rate terms; issuers that have mGIC bid it pay no direct fee, because mGIC's fee is paid by the winning provider at or below the safe-harbor maximum in the Treasury arbitrage regulations and is disclosed.

What credit, collateral and downgrade protections does a GIC carry?

A GIC's protection has three layers: the provider's own credit standing, collateral or rating conditions imposed by contract or state statute, and downgrade remedies negotiated into the agreement.

Texas shows the statutory collateral layer: Texas Government Code §2256.015 makes a guaranteed investment contract an authorized investment for bond proceeds under the subchapter when it has a defined termination date, when it is secured by obligations listed in §2256.009(a)(1), excluding the mortgage-backed instruments in §2256.009(b), in an amount at least equal to the bond proceeds invested under the contract, and when the collateral is pledged to and deposited with the entity or a third party it selects and approves, with §2256.015(d) applying §1371.059(c) to execution.

That authorization reaches bond proceeds only, not general operating funds.

Colorado shows the rating layer: Colorado Revised Statutes §24-75-601.1(1)(l)(I) permits guaranteed investment contracts, guaranteed interest contracts, annuity contracts and funding agreements when, at the time the contract or agreement is entered into, the provider or its guarantor is rated in one of the two highest categories by two or more nationally recognized statistical rating organizations, whether the rating measures long-term credit, financial obligations, claims-paying ability or financial strength.

The Colorado statute sets the test at entry and, on its text, does not itself prescribe a downgrade remedy.

Downgrade remedies live in the contract: Ambac's Form 10-K for fiscal 2008 reported that most of its investment agreements offered multiple remedies, including collateral posting, termination of the contract, or designation of a replacement guarantor, which describes one provider's contracts, not market-standard terms.

How those levers work in a negotiation is the subject of the guide to downgrade protection.

How do municipal GICs differ from retirement plan stable value contracts?

The retirement-plan contract in the CFTC and SEC's study is the stable value contract, which they describe as a component of a stable value fund, purchased from providers including banks and insurers, that provides a guarantee, or wrap, to pay plan participants at book value.

It is a different product in a different regulatory setting from a bond-proceeds investment agreement: the wrap stands behind a plan participant's book-value balance, while a bond-proceeds GIC stands behind an issuer's deposited proceeds and runs on the issuer's draw schedule.

The CFTC and SEC took public submissions in 2011 for the Dodd-Frank Act study of whether stable value contracts are swaps, and this page takes no position on where that study ended.

When is a GIC the right fit for bond proceeds?

A GIC's contract fixes its rate and maturity, and the safe harbor ties its solicitation terms to the issuer's reasonably expected deposit and drawdown schedule, so the instrument is aimed at proceeds with a known deposit date and a predictable drawdown, and whether one fits a given issue turns on the draw schedule, state law and the federal tax tests, none of which this page decides.

The federal constraint on long contracts is the hedge bond rule: IRS Publication 4079, summarizing §149(g), explains that a bond is a hedge bond unless the issuer reasonably expects 85% of spendable proceeds to be used within 3 years and no more than 50% of proceeds is invested in nonpurpose investments whose yield is substantially guaranteed for 4 years or more.

Publication 4079 lists exceptions, including issues where 95% of proceeds are invested in non-AMT tax-exempt bonds, and issues with a 10%, 30%, 60%, 85% spending schedule over 1, 2, 3 and 5 years that also pay 95% of legal and underwriting costs within 180 days.

State statutes then layer on their own conditions and term limits.

Each row compresses conditions the sections above state in full, a state's statute reaches only issuers in that state, and the state guides for Texas, California and Colorado take the details up.

The tradeoffs against a repurchase agreement are weighed in the GIC vs flex repo comparison, and the owned-securities alternative is compared in GIC vs Treasury ladder.

An issuer with a GIC already in place can put its terms against the market in a review of an existing investment.

Whether a GIC's terms satisfy a particular indenture, state statute and the arbitrage rules is a conclusion for bond counsel and tax counsel, not one this page makes.

If you want an independent, no-obligation read on how a competitively bid GIC would line up with your fund's objectives, permitted investments and draw schedule, mGIC offers a free reinvestment review, and its daily rate emails cover Treasury yields, SOFR and SLGS each business day.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.